Risk-Based Capital Ratio
Updated: 26 November 2024
What Does Risk-Based Capital Ratio Mean?
The risk-based capital ratio measures an insurance company’s assets minus its liabilities. Its primary purpose is to ensure the company does not take on more risk than it can manage.
Typically, a ratio of 1.00 or higher is considered acceptable.
Insuranceopedia Explains Risk-Based Capital Ratio
If an insurance company takes on excessive risk without sufficient capital to cover it, it risks bankruptcy if a large number of claims are filed simultaneously.
Natural disasters such as tornadoes and hurricanes can trigger a sudden surge in claims. In such cases, a strong risk-based capital ratio helps safeguard both the insurance company and its policyholders from significant financial harm.
